All right, good afternoon, everyone. Thanks for joining us at this year's Canaccord Genuity Growth Conference. My name's Caitlin Cronin. I'm one of the medical device analysts here at Canaccord Genuity, and I'm pleased to be joined this afternoon by Vericel, who's c ommercializing a fully integrated, autologous cell therapy platform and licensed biologic technology, addressing the sports medicine and severe burn care markets. With me today is Nick Colangelo, CEO, and before I begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and our firm website. We'll begin with a brief presentation by the Vericel team, followed by a fireside chat, and I'll try to leave a couple minutes at the end for any questions from the audience. With that, I'll turn it over to Nick.
Okay, well, thank you, Caitlin. It is great to be here, and I, I'm hoping my biggest challenge of the day is to try to tell this story in 10 minutes, so we can move on to the fireside chat portion. So before we begin, just wanna remind the audience that this presentation will contain forward-looking statements, and you should refer to our documents on file with the SEC for further information. So Vericel is a leading provider of advanced therapies for the sports medicine and severe burn care markets, and we have a highly differentiated portfolio of innovative products that are advanced cell therapies that use a patient's own cells to repair tissue and restore function, and specialty biologics.
I think one of the defining characteristics of our portfolio, as we'll talk about in a moment, is the fact that we have significant competitive barriers to entry. So MACI, which is our cartilage repair product, and Epicel, which is used in severe burns, are regulated by the FDA as combination device biologic products, and so there's no generic pathway for other products to enter these markets, so very significant barriers there. And then NexoBrid, which is also used in severe burns, is an orphan biologic in the U.S., so it has 12 years of biologics data exclusivity, 7 years of market exclusivity, and really no other kinda like products in development. So we think this portfolio is an exceptional foundation to continue our strong growth in both revenue and profits in the years ahead. So MACI is our lead product.
It's a product that uses a patient's own cells to repair and restore function for knee cartilage injuries. It's become the leading by far, and the only FDA leading cartilage repair product in the market and the only FDA product in its class. Cartilage injuries are a significant issue. About 60% of knee arthroscopies identify a cartilage injury, and the issue is that cartilage does not have intrinsic healing properties. If left untreated, these defects, which are like a pothole on the surface of the knee, essentially get larger, lead to osteoarthritis, and then ultimately partial or full knee replacement. What MACI does is we take a small biopsy of a patient's cartilage, we isolate the chondrocytes that produce cartilage, we expand the cells, seed them on a resorbable collagen membrane that's surgically implanted.
The cells migrate down to the subchondral bone, begin to produce the extracellular matrix that makes cartilage, and it fills the defect and allows patients to get back to their, their normal activities. So really, it's the only FDA-approved product in its class, as I mentioned, and by far, the leading cartilage repair product on the market. There's a very large addressable market. There's about 1 million cartilage repair procedures that are done in the U.S. each year. About three-quarters of those are for knee cartilage injuries, so about 750,000, and we define our addressable patient market as about 60,000 patients per year.
Our revenue per implant is north of $50,000, which leads to a very large $3 billion+ addressable market, which certainly supports the growth that we've seen since we launched the product in 2017. MACI, the core procedure, is done through a mini arthrotomy, so an open procedure, and it was a significant procedural advancement versus earlier generations of the technology, which were highly invasive, very technically demanding, and time-consuming. So the reason MACI has gotten such broad adoption and gone from hundreds of surgeons a year taking biopsies to thousands of surgeons a year is that it's a much simpler, less invasive, less time-consuming procedure.
We're now focused on further procedural advances with MACI, the arthroscopic delivery of MACI or MACI Arthro, which we hope to have approval for this quarter and launch, which will continue on that journey of taking a highly invasive surgery and moving it to even further down the pathway of a minimally invasive surgery. So we're really excited about that. It's addressed to a certain size of defect on the femoral condyles or the end of the thigh bone, which makes up the largest part of our addressable market. So about 20,000 of the 60,000 procedures that are done each year are for 2-4 square centimeter defects on the femoral condyle. So we think that will allow us to have even further penetration into the biggest part of our addressable market.
We also, you have articular cartilage on the ends of all your bones and all the joints, and so, you know, MACI is not just limited to cartilage injuries in the knee. It's by far the largest market because the knee's the greatest weight-bearing joint in the body, and so you have a lot of injuries in the knee. The second largest opportunity is in the ankle, and as we talked about on our earnings call for the Q2 we plan to initiate a study for the use of MACI, MACI, to treat ankle cartilage defects, which again, there's about 165,000 cartilage resurfacing procedures that are done in the ankle each year.
About 20,000 or so make up the addressable market for MACI, which again, at our price point, is about a billion-dollar opportunity, and combined with the need, means there's about a $4 billion market opportunity for MACI. So turning to our burn care franchise, we are focused on the treatment of hospitalized patients with severe burns, and for these patients, there's really two aspects to the treatment pathway. First, you have to remove the damaged tissue or eschar, and then secondly, cover the wound or graft the wound so that the healing process can begin. And we actually have products that address both part of the treatment pathway. So the first product is NexoBrid, which we licensed back in 2019 and launched last year. It's indicated for eschar removal in adult patients with severe burns.
It really is going to, we believe, change the standard of care. Right now, for these hospitalized burn patients, the standard of care is surgical excision. A patient is taken into the OR, and basically, with a knife, they remove the damaged tissue. It's very traumatic for the patient. There's a lot of blood loss, healthy tissue loss, and so clearly a need for a selective and effective eschar removal agent, and we think that is NexoBrid. NexoBrid is a mixture of proteolytic enzymes that are able to recognize collagen proteins in the skin that are denatured from thermal burns, and it's topically applied, and over the course of hours, it dissolves away the burned tissue or eschar and leaves the healthy tissue. Then you simply, you know, scrape off the dissolved eschar, and then you can start the healing process.
So obviously, much less traumatic for patients, and we believe over time, again, will become the standard of care in eschar removal. Again, once you remove the eschar, then you have to graft the wound to promote the healing process, and that's where Epicel comes into play. So Epicel is the only FDA approved permanent skin replacement for full-thickness burns that are 30% or more total body surface area. So it's a very important product. You know, skin is an organ, but you can't do an organ transplant. Skin is highly immunogenic, so if you tried to, you know, do a transplant of a skin graft, body would just basically slough it off. So really, the only other alternative for these severe burn patients is to do serial autografts.
When you have these severe burns, there's often not enough healthy tissue to do that. So Epicel is much like MACI, where we take a small biopsy of a patient's healthy skin. We isolate the keratinocytes, which are the predominant cell in the epidermal layer of the skin. We culture them. They form a sheet of skin, as you see there, apply a petroleum gauze, and those are basically the skin grafts that are applied to the patient. 7 days later, take off the gauze, and their new skin is exposed. So it's a really amazing product, life-saving product, and one that, you know, we've continued to drive growth of over the years. So when we look at the addressable market for the burn care space, there's about 40,000 hospitalized burn patients in the U.S. each year.
We estimate that about three-quarters of those, or 30,000 patients per year, need some sort of eschar removal. And at the price point for NexoBrid, which on average is kind of in the $10,000 per patient range, it's about a $300 million opportunity for us. And then as you go down the funnel, there's about 600-800 surviving patients with, you know, 40% TBSA burns or greater. Epicel is very much like an orphan product. We're treating a 100-ish patients per year. The average order size and revenue for us is around a $250,000. And so, you know, based on the price of the grafts and the average grafts that are used, you know, it's essentially another $300 million market opportunity for us, so combined, greater than a $500 million market opportunity.
We think, you know, will become another second or a second high-growth franchise for us as we, our guidance this year would suggest about a 30%, growth rate for the burn care franchise as a whole. So we think the company is very well-positioned to continue our strong revenue and profit growth. We have a, you know, a great financial profile, where we've been growing at 20%+ rate on the top line. We've had 4 straight years, essentially, of every quarter having a positive adjusted earnings and operating cash flow. We ended the Q2 with about $154 million in cash and no debt, so very strong financial profile. In our current core business with MACI, continued high growth, up 25% last year.
So even seven years into launch, you know, it continues to significantly expand, driven by strong growth in the surgeon adoption of the product, and so on. We have a, you know, exciting pipeline, where this quarter, we hope to have both a pediatric indication for NexoBrid, the MACI arthroscopic indication, and then we'll be meeting with the FDA, and hope to start our MACI ankle study next year. So good, strong growth drivers, as we continue to move forward. And we have a strong track record of revenue and profit growth. So, as I mentioned, we've been growing at a 20%+ compounded annual growth rate, for this year, we've guided to about 20%-23% growth, or $238 million-$242 million.
We expect, given the strength of our core business and our new product launches, that we'll be in the 20%+ growth rate next year as well. So really durable growth in our current portfolio, and then the additional new products will help maintain and perhaps even increase that growth as we move forward. That's translated into a very strong profitability profile. So for instance, last year we had 20% top-line growth, but we had 40% adjusted earnings growth. So we're continuing to see the leverage in our business, as we continue to grow the top line. And we actually increased our profitability guidance this year to 71% gross margins and 21% Adjusted EBITDA margin, which again, is a good proxy for our operating cash flow.
So if you take the $240 million revenue guidance, 20% Adjusted EBITDA margin, it's around $50 million, which again, is a good proxy for our operating cash flow. So, you know, we're really excited about the outlook for our business going forward, and so I'll stop there, and then we'll do the fireside chat.
Great. Thanks, Nick.
Yep.
I guess just starting off with the Q2, given you released Q2 results recently, what do you-- what would you like to highlight from the Q2 results?
Well, you know, it was another strong quarter of revenue growth, so we had record Q2 revenue for the company of about $53 million. We had record MACI revenue for the Q2 . We had a pretty good progression, solid progression in Epicel, you know, in NexoBrid demand, so pretty strong revenue profile. We had gross margins of 70%, which was the highest ever for a Q2 , and that was up 400 basis points versus last year. And then we had 42% growth in our adjusted earnings, $18.5 million in operating cash flow, and so it was a pretty strong quarter from a financial perspective. And I think equally important, for the first half of the year, we had 20% company, total company revenue growth, 20% MACI growth, 20% Burn Care growth.
Gross margins were up 400%, adjusted earnings were up 120%. So it's been a good first half of the year, from a financial standpoint.
That's great. You know, you touched on first half Burn Care growth being 20%+. You know, Epicel came a bit under expectations for the quarter, but on the first half was definitely on track from a growth-
Yep
... perspective. You know, the segment is notoriously lumpy from, you know, a quarterly revenue perspective. Can you just give the audience the context for, you know, why it's lumpy from a quarterly perspective, but, you know, why you expect growth to trend very well from-
Yeah
... you know, a longer-term perspective?
Well, you know, I think it starts with the fact that, as I mentioned, there's really, you know, a relatively small patient population that have these severe burns and actually survive. So, you know, if you think about treating 100 patients per year, and it's pretty good penetration, but a lot more room to go, 100 out of the 600 patients, so kind of mid-teens penetration, but again, we think we're gonna be able to improve on that. It's about 25 patients a quarter, you know, 8 a month. So you can have... These patients are critically ill. They're in the hospital for months. You know, they expire, unfortunately, sometimes. Sometimes they're too... They're not healthy enough to have surgery, so surgeries can be canceled or moved into the next quarter.
So it's just really an issue of small numbers, and when the average order is, call it $300,000 per order, and sometimes it can be double that, you know, they're big numbers that are moving around. Your point is a good one, which we said, you know, we came into the year at about an $8 million a quarter run rate. We said we expect that to grow double digits for the year, 'cause we try to look at it on an annual basis. And so for the first half of the year, we're at kind of a $9 million run rate, double-digit growth, so kinda right where we expected to be.
It's just lumpy, and one quarter was $10.6 million, one was more like $8 million, and so, you know, you do get some pretty wide disparities, but, you know, demand remains strong. Interestingly, we pointed out on our Q2 earnings call that the number of biopsies we got in each quarter was similar, and it just tells you that there's a big difference in the patients that end up getting treated, depending on these patient health issues that I mentioned.
And then you mentioned raising your margin guidance on the call. What gives you the confidence in hitting that higher target into the back half of the year?
Well, as I mentioned, we have a lot of leverage in our business, where it's relatively fixed costs. And so when you start increasing revenue, you know, we talked about in the first part of the year, the pull-through on the gross margin line was north of 80%. The pull-through on the adjusted earnings line was north of 50%. And so that it just starts with that leverage. So as you have, you know, high revenue growth, maintaining that, and then kinda just structurally, the leverage in our business and how we manage it, it translates into strong profit growth.
That's great. And then maybe just touching on your product pipeline, you've already noted the two pretty near-term indication expansions coming up.
Right.
Maybe let's start with MACI Arthro... You know, why was this an important capability for you to develop? And, you know, what's your commercialization strategy going to look like once you receive, you know, the clearance?
Yeah. So the reason it's important is what I mentioned during my prepared remarks, which is that, you know, it's really just a continuation of that journey to becoming a even more minimally invasive procedure. So that's always important. You know, right now, MACI is kind of a go-to product for cartilage injuries on the back of the kneecap or the patella. Some of the other alternatives aren't particularly easy to do on the back of the kneecap. So we have a disproportionate share of kind of the patients in the TAM with patella injuries. Also, injuries that are, or defects that are bigger than 4 square centimeters, we kinda have a higher share, no matter where in the knee that occurs, 'cause again, it's harder to... Microfracture doesn't work well in those larger defects.
Osteochondral allografts or cadaver-based plugs are kinda hard to do for a bunch of reasons. So that's where kinda we have a disproportionate share. As I mentioned, you know, there's about 10,000 patella cases each year. There's about 20,000 of these 2-4 square centimeter defects that are on the end of the thigh bone or the femoral condyle, so it's the biggest part of the market by far. We certainly have business there, but at a much lower rate, 'cause you can do some other things. With an arthroscopic procedure, as compared to, for instance, an osteochondral allograft, which again is taking a plug of a cadaver knee and filling the defect that way, that has to be done as an open procedure. MACI will be done as an arthroscopic procedure. That has a lot of patient benefits, right?
Where you have, presumably, and we believe, and surgeons believe, that you have, with a smaller, you know, less invasive procedure, you're gonna have better, lower, less postoperative pain, better postoperative healing, and then better aesthetics. And so it's just a better procedure for the patients as well.
Mm-hmm. And I think you've talked about, you know, maybe increasing the amount of, surgeons that-
Yep
... you could, that are applicable to, this procedure. How, you know, how much does this actually increase-
Right.
-your-
Yeah
... applicable surgeon base?
So to the second part of your question, the commercialization plan, we definitely will, right now, we have 5,000 target surgeons that we call on, that we can buy procedural data, and these are surgeons that do high volumes of cartilage repair and open procedures. There's a group of surgeons out there that basically just do arthroscopic procedures, and we know which ones do. There's a couple thousand surgeons that do high volumes of cartilage repair, so we'll be adding those to our current reps' target list. With 75 territories, that's, you know, roughly 20 per territory. So the commercialization plan is to add those targets for those for the reps. Now, there's also current MACI users, right?
They, too, in our market research, have indicated that they would expect to switch some of their current procedures to MACI Arthro, and so in that case, they will start taking biopsies of new patients that with the appropriate defects. But they also have a pool of existing biopsies with 2-4 square centimeter defects. We know those patients and those surgeons, so our reps will be kinda obviously calling on the surgeons with respect to those patients that have current biopsies taken for the appropriate defects.
Any plans to add reps to the sales team in anticipation of this launch?
Yeah, so we'll. You know, we're not gonna realign territories in some of our higher volume or more geographically dispersed territories. We've even last year added a few, what we call territory development reps or junior reps, who really cover a lot of the cases and biopsies and so on, so that our sales reps can focus on demand generation. So we envision adding, you know, probably half a dozen more reps and some arthroscopic specialists who can be there when surgeons are doing their first arthroscopic case. So really, you know, call it roughly a dozen folks, so, you know, kind of minimal sort of commercial investment to be able to launch this product.
And then just touching on the other opportunity that's coming up, the NexoBrid pediatric indication.
Yep.
You know, what's the incremental opportunity here versus what you're already doing right now in selling to burn care centers?
Yep. So I think, as I mentioned earlier, there's 140 burn centers in the country. Our initial launch with NexoBrid for adults was for 90 tier one and tier two centers, you know, based on volume or Epicel relationships and so on. There's about 20 pediatric burn centers in the country that we haven't been calling on, you know, without the, obviously, without the pediatric indication. So we will add those to our target list, and, you know, that, they're in... You know, there's a good number, somewhere, call it, between 20% and 30% of hospitalized burn patients are pediatric patients. Obviously, they can be treated in other centers as well as the pediatric burn centers, but this, you know...
And you'll have some surgeons who have already treated pediatric patients, but really you'll have another set that say, "We're not gonna use..." Or a hospital will say, "We're not using the product until we have the pediatric indication." So, you know, we think, as we said on our earnings-